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A Closer Peek at SingTel’s Australian Story

Singapore Telecommunications (SGX: Z74), or more popularly known as SingTel, is a household name among locals for its ubiquitous presence in the telecommunications market here. In Singapore, Starhub (SGX: CC3) and M1 (SGX: B2F) are quite clearly playing second fiddle to SingTel. But, that’s not the case with the company’s operations in Australia.

It might come as a surprise for some, but SingTel’s businesses in Australia, represented by its full ownership of Optus, is in some aspects, as equally or even more important than its businesses in Singapore. For instance, in the financial year ended 31 March 2013, the geographical market of Australia accounted for S$1.346 billion of SingTel’s total pre-tax profits of S$4.131 billion. That was just a hair more than Singapore’s contributions of S$1.345 billion.

In addition, Optus has been picking up the slack for SingTel as the latter’s corporate performance in Singapore has been waning over the years.

But whereas SingTel’s in a more dominant position than its competitors in Singapore, Optus is the one lagging behind Telstra (ASX: TLS), a company that’s numero uno in Australia’s telco industry.

SingTel just released its third quarter results this morning and saw its quarterly profits grow by 5.5% year-on-year to S$872 million even though revenue had dropped by 7.3% to S$4.26 billion. In particular, Optus reported some great figures for its bottom line, which jumped by 41.4% to A$227 million from A$160 million a year ago.

SingTel’s Australian subsidiary saw some nice progress on its aims to improve customer experience and deliver sustainable profit growth. For instance, new customer complaints about Optus’ service to the Telecommunications Industry Ombudsman in Australia during the quarter had declined by 50%. Elsewhere, Optus’ churn rate for the quarter – percentage of subscribers that quit the service – among its mobile postpaid customers (i.e. subscribers) had also dropped from 1.8% in the previous year to 1.4%.

And of course, Optus’ progress in delivering profit growth was self-evident. But while there are a number of good things happening with Optus, there’re also some areas of concern.

The Motley Fool Singapore had recently started a Tug-of-Fools series with Shares Investment where each party would represent a bull or bear case for a particular company. My colleague David Kuo came up with SingTel’s bull case, citing his views on why SingTel’s a quality company with an impressive return on equity of 17%, which is nearly twice the average for the Straits Times Index (SGX: ^STI). On the flip side, Louis Kent Lee was the bear as he pointed out Optus’ difficulties operating in Australia with Telstra dominating the landscape.

Judging from some of the numbers Optus had released, Lee does have a point. As fate would have it, Teslra also released its latest half-year results today in Australia and saw revenue for the period increase by 4.1% year-on-year to A$12.6 billion whilst profits were up 9.7% to A$1.7 billion. More importantly, Telstra added 739,000 mobile customers in the period to bring its tally up to 15.8 million.

In contrast, Optus had seen a decline in its mobile customer numbers in the quarter from 9.57 million a year ago to 9.43 million. It was also its third consecutive quarter of shrinking customer numbers.

Then, there’s also 4G networks to think about. It is one area of growth for telecommunication companies and on that front, Telstra commented in its latest earnings release that it would be rolling out its 4G network to 85% of Australia’s population by Christmas. On the other hand, Optus only intends to provide “70% on-street metropolitan coverage” for its 4G network by the end of March this year. Judging from that, it seems likely that Optus would end up lagging behind Telstra in terms of 4G coverage in the country.

In SingTel’s earnings release, it highlighted lower mobile revenue from Australia as one of the main reasons for the decline in its top-line. And, that’s also one of the areas of concern. Optus has done admirably in vastly improving its profit margins but at the same time, its revenue also declined by 5.4% year-on-year to A$2.16 billion in the quarter.

A company can’t depend purely on improvement in margins for profit growth over the long-term as profit margins can only be pulled up to a certain point before there’s simply no longer room for improvement. In other words, top-line growth is still vastly important. And on that front, Optus has been lagging as its operating revenue has been decreasing since at least the quarter ended 30 June 2013.

All told, Optus has been doing some great work in improving both profit margins and customer experience. But at the same time, it faces intense competition from Telstra and has to eventually find ways to improve its revenue to grow.

Can it do so? SingTel’s investors had better pay close attention to that question.

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Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

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